The IRS and Forms 1099-INT: We Remain Curious

One of the benefits of writing this blog is that it gives me the opportunity to learn. Last week, in Does the IRS Issue Forms 1099? Should It?, I asked whether the IRS is required to issue Forms 1099 when it pays interest, whether it does so, and whether it ought to do so. Two days later, in More on the IRS and Form 1099-INT, I shared one response that came my way. Mary Lew Kehm, a CPA and PFS (personal financial specialist) reported that she has had clients who received Forms 1099-INT from the Treasury Department. Like me, she could not figure out why the taxpayer in Megibow v. Comr., T.C. Memo 2011-211, the case that triggered my questions, did not receive a Form 1099 for interest paid by the IRS. After doing a bit more research, I shared my discovery that the Treasury Department issues Forms 1099-INT with respect to some, but not all, discounts on, and redemptions of, Treasury obligations. That there is inconsistency seems an inescapable conclusion.

Two more replies have arrived. A practitioner in upstate New York reports that “most” of his clients do receive Forms 1099-INT in connection with interest paid to them by the IRS. He suggests that but for those forms he might not otherwise know that the clients had received interest. James Brower, a CPA with a Masters of Science in Taxation who practices not far from me, also reports that Forms 1099-INT are issued with respect to interest paid by the IRS, though he does not think the IRS is required to issue those forms. He explains:

IRC §6049 spells out the rules regarding when payments of interest need to be reported to the IRS. However, IRC §6049(b) has its own definition of “interest” which is much narrower in scope from that of IRC §163. If you read through IRC §6049(b) you will see what payments constitute “interest” for purposes of 1099-INT reporting, and you won’t find interest paid on tax refunds listed there.

Also, if you look at Treasury Regulation §1.6049-5(b)(4) you will see that for purposes of 1099-INT reporting, interest does not include “interest that a governmental unit pays with respect to tax refunds.” I think that the Regulation pretty much answers the question.

Mr. Brower suggests that the IRS – and some states – issue the Form 1099-INT, even though not required to do so, because it encourages taxpayers to report the interest income. Perhaps, he surmises, the lack of the Form 1099 in Megibow caused the taxpayer not to report the interest income. Mr. Brower also suggests that “based on my 20+ years of dealing with the public in preparing tax returns, I’d say that a good segment of the population of this country honestly believes that income is taxable only if it gets reported to the IRS on a 1099, W-2 or other information return.” I agree. More than one student in my basic federal income tax over the past 20+ years has commented, not in these exact words, “If the IRS doesn’t know about it, is it really income that needs to be reported?”

In my reply to Mr. Brower, I said:

Thank you for your analysis. I agree with you. The lack of a requirement combined with the sending of Forms 1099 raised the same question for me. I think your answer makes sense. What continues to puzzle me is (1) did the IRS issue a Form 1099 to Mr. Megibow? (2) if not, why not? (3) if yes, why did the IRS not contest his assertion that it had not sent one?

When he in turn replied, Mr. Brower shared his guess that we will never know the answer to my first two questions. That’s frustrating. I’m confident I’m not the only one who wants to know. Those questions are at the heart of what inspired the initial post on this issue. As for the third question, his guess is that IRS counsel did not think it was necessary to contest Megibow’s claim that a Form 1099 had not been sent. The interest is includable in gross income whether or not a Form 1099 is sent or received, and thus the IRS can win – as it did – without that evidence. Yet, would it not be sensible to introduce proof that the Form 1099 was sent? Would that not chip away somewhat at the taxpayer’s factual presentation, gross income concepts aside? Could it be that IRS counsel tried to obtain a copy of the Form 1099 sent to Megibow, but was unsuccessful because someone on the Commissioner’s side could not find it? But if it cannot be found, ought one assume it was sent?

How many other taxpayers who receive interest from the IRS fail to receive a Form 1099 and then in turn do what Megibow did? Does anyone know? Yes, the IRS could cross-check its record of interest payments with the copies of the Forms 1099 it has sent. This sort of self-audit would be useful to the IRS, to taxpayers generally, and to the nation. So now my invitation is to someone at the IRS to enlighten the rest of us. We remain curious.

Even Giants Make Tax Mistakes

A practitioner pointed me in the direction of an H&R Block Press Center Newsroom Story Ideas posting, titled, “Renting Your Vacation Home: What Are the Tax Breaks?” The article points out the sort of expenses that qualify as deductible because of the rental activity, and correctly notes that if the property is rented for fewer than 15 days during the taxable year, those expenses cannot be deducted and the rental income is excluded from gross income. The article proceeds to define what constitutes a personal use day for purposes of determining whether the section 280A limitations apply.

The article provides an example of how to pro-rate rental expenses between personal use days and rental days. In the example, there are 90 days of rental use and 225 days of personal use. The taxpayer in the example has $4,500 in “mortgage insurance” – by which I assume is meant “mortgage interest” because there is no other item tagged as “mortgage interest” and there would not be “mortgage insurance” without “mortgage interest” – along with $3,000 in real property taxes and $17,200 in expenses deductible only on account of rental activity, such as cleaning, insurance, repairs, utilities, and depreciation. According to the example, the taxpayers are permitted to deduct 90/225 of this amount.

There are two errors in this example. The first is the use of a fraction 90/225. The total days of use equal 315 (90 + 225). Thus, the rental portion is 90/315, not 90/225. The second is the lumping together of the deductions allowable in any event (mortgage interest and real property taxes) and the deductions allowable only on account of the rental use. This approach is the position taken by the IRS, but it is a position rejected by taxpayers and by the courts.

Understanding the second error requires a bit of background and an exercise in statutory interpretation. Section 280A(e) provides as follows:

(e) Expenses Attributable to Rental.--
(1) In general.--In any case where a taxpayer who is an individual or an electing small business corporation uses a dwelling unit for personal purposes on any day during the taxable year (whether or not he is treated under this section as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used.

(2) Exception for deductions otherwise allowable.--This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented.

Thus, it is appropriate in the example to multiply $17,200 by the rental use fraction (90/315, not 90/225). However, the mortgage interest and real property taxes are not subject to the section 280A(e) fraction. Instead, when computing the limitation on the total deductions attributable to the rental activity, as provided in section 280A(c)(5), the taxpayer must reduce rental gross income by “the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used.” Translated, the means the reduction equals “the mortgage interest and real property taxes allocable to the rental use” because those deductions are allowable whether or not the property is used as rental property. Thus, the question is, “What is the meaning of ‘allocable to such use’?” The IRS takes the position that the allocation is computed using the rental use fraction, and in the case of the example, by using 90/315. Thirty years ago, a taxpayer took the position that the appropriate fraction was 90/365, arguing that a portion of the interest and taxes relate to each day in the year, and pointing out that if Congress wanted to use the section 280A(e) fraction it would have used the section 280A(e) language in section 280(c)(5), something it did not do.

The taxpayer, in Bolton v. Comr., 77 T.C. 104 (1981), prevailed. The IRS appealed to the Ninth Circuit. It lost. See Bolton v. Comr., 694 F.2d 556 (9th Cir. 1982), aff’g 77 T.C. 104 (1981). In the many cases that have since arisen dealing with this issue, the taxpayers have prevailed, including a decision in the Tenth Circuit that followed the Ninth Circuit reasoning. Yet the IRS persists, perhaps hoping that another appellate court will decide in its favor, leading to a decision by the Supreme Court to resolve the dispute. Unfortunately, the IRS position is flat-out wrong, it has been consistently and uniformly rejected, and it puts taxpayers in the unfortunate position of choosing between an adverse tax outcome or the risk and cost of an IRS audit and litigation.

For a commercial tax return preparer to provide an example that makes no mention of the Bolton case or its progeny is appalling. How many taxpayers will end up paying more in taxes than current law requires? I’m told by the practitioner who alerted me to this web page that the same article appeared a year ago, the practitioner called and explained the errors, and the page was taken down. Now it has reappeared. The practitioner noted that another phone call this year is very unlikely.

Teaching section 280A in the shadow of Bolton and the IRS refusal to concede makes the basic tax course even more challenging, for me and for students, than it otherwise needs to be. The only silver lining in the cloud is that it provides an opportunity to help students think about the advice they would give to a client or tax return preparer who faces the issue. How should the tax return be filed? What are the advantages and disadvantages of using the Bolton approach? What are the benefits of following the IRS approach and ignoring the Bolton line of cases? Someone who relies on the H&R Block Press Center Newsroom Story Ideas posting would not be asking those questions because they are not being asked those questions. They would be living in an artificial tax world in which Bolton and its progeny do not exist. That’s not a good way to practice tax.

Destruction: Natural Disasters and Taxation

Many months ago, back in March, KVUE in Austin, Texas, ran a story that certainly did not get my attention and probably did not get much attention outside of Texas. Hundreds of firefighters, most of them volunteers, gathered in the state capital to honor colleagues who had died in the line of duty and to protest budget cuts that would reduce state funding for fire fighting services from $30 million to $7 million. Already under financial stress, volunteers report using personal funds to pay for equipment, repairs, supplies, and upkeep of fire houses. The executive director of the State Firemen’s and Fire Marshals’ Association of Texas, representing 21,000 firefighters, said of the impact of these cuts, “ . . . it doesn’t help us out any whatsoever, . . . I think the citizens and the public is going to see that.” These have turned out to be sadly prophetic words.

Fast forward to August. Numerous reports, including this one, bring news of wildfires throughout Texas that have destroyed more than 1,000 homes, including one 48-hour period in which 852 residences were devastated. One need only look at map of Texas wildfires to see the incredible scope of the problem.

Here’s the challenge. It costs money to fight wildfires. Yet the governor of Texas and his political allies, as a price for keeping taxes artificially low, decided to cut firefighting assistance funds by more than 70 percent. Surely, considering that firefighters already were laboring under financial shortfalls, this was not a matter of the typical “we need to cut wasteful spending” excuse for trying to shrink government. Here’s some wisdom for the anti-tax crowd: shrunken and destroyed governments cannot protect citizens from rampaging wildfires.

So what does the governor of Texas and his political allies propose to do? They want money from the Federal Emergency Management Agency (FEMA). Apparently it doesn’t matter that the governor of Texas has been very critical of FEMA. Now, according to this report, he claims that this is “not the time to worry about reforming the agency.” Apparently it doesn’t matter that FEMA is running out of money. According to many reports, including this one, FEMA is almost out of money, but House Republicans want any FEMA funding increase to be offset by spending in other areas. Perhaps we should cut salaries and benefits for Congress and its staff.

The governor of Texas is not the only advocate of lower taxes and small government to turn to the federal government to ask for funding. The governor of New Jersey sent a letter to the President asking for federal assistance. The governor of Pennsylvania, another anti-tax zealot, also asked for federal assistance. Neither specified whether that assistance should be funded with tax increases or cuts in spending, and though one should expect that they would prefer the latter, as do their ideological counterparts in Congress, neither one dared to suggest who should bear the burden of those spending cuts in order to assist their states.

As I pointed out recently in Storms, Public Infrastructure, and Taxes, the solution offered by the anti-tax zealots is to cut spending, which means reduced funding for fire departments, police protection, public sewage treatment plants, and other essential services. The anti-tax folks in Texas have provided a wonderful example of what happens when fire fighting funding is cut.

The mind-set of rejecting government, and opposing taxation in order to shrink, and as some anti-tax advocates explain, to eliminate, government, and yet begging for money from government when things get rough, makes me think of another mind-set. This behavior immediately reminds me of the teenager who wants nothing to do with his or her parents until the youngster realizes that the parents are needed for help. Anti-authoritarian suddenly become appreciative of the social benefits of a government using its authority protecting its citizenry when they or those on whom they rely for votes are in need of help. The anti-tax campaign is not so much a simple opposition to taxes as a philosophical ideal, but a desire to eliminate funding for regulation and supervision of business and other activity. That regulation, designed to protect workers and the environment, to give but two examples, prevents people from simply doing whatever they want to do, perhaps in pursuit of money and perhaps in pursuit of fun, without regard to the cost that they impose on other people when they shift the cost of their activity onto others.

The anti-tax crowd is more than anti-tax. That is another reason why I explained, in Storms, Public Infrastructure, and Taxes, that “I shudder in horror at the total inanity and stupidity of the anti-tax pledge.” From the perspective of the well-being of democratic, pluralized, just, and economically balanced society and the governments necessary to protect that lifestyle, destroying the life-blood of freedom by using a self-centered definition of freedom is stupid. Perhaps one of the most outspoken Republican candidates for the presidency is correct. Perhaps, as she claims, all of these natural disasters are a divine message, but not the message she thinks it is. Perhaps they are intended to educate people. Perhaps when the dangers of destroying government is highlighted by actual catastrophe rather than hypothetical scenarios posed by pundits will people wake up to the siren song of the self-centered. Perhaps one lesson is that not only can taxes be too high, they can be too low. A slew of natural disasters is bringing that point home, whether or not someone attaches a theological interpretation to these catastrophes. Taxes that are too low can be as destructive as natural disasters.

More on the IRS and Form 1099-INT

My Wednesday post, Does the IRS Issue Forms 1099? Should It? brought a response from Mary Lew Kehm, a CPA and PFS (personal financial specialist), who practices a few counties away from here. She reports that she has had clients who received Forms 1099-INT from the Treasury Department. Thus, she concludes either the government is not being consistent, or there was something unusual in Megibow v. Comr., T.C. Memo 2011-211, that the Tax Court did not disclose. I agree. I also think that whichever is the explanation, something is awry and needs attention.

A little more research discloses two interesting tidbits. According to William J. Coffey, Strengthening Treasury Direct:

Treasury Direct issues selected 1099 forms. Interest Form 1099-INT reports discounts on Treasury bills and interest payments on notes and bonds. Proceeds from redemptions of notes and bonds are reported on Form 1099B. The Internal Revenue Service requires Form 1099-OID for reporting an original issue discount on notes and bonds. However, Treasury Direct only issues this form for inflation-indexed notes.

First, the Treasury Department, of which the IRS is a part, does issue Forms 1099, but the issuance comes from a part of the Treasury Department that is not the IRS. Second, this form is issued with respect to some, but not all, discounts on, and redemptions of, Treasury obligations, and thus there is inconsistency in this regard.

Anyone who can enlighten me is invited to do so. What are the requirements? Are they being followed? And if the inconsistency is consistent with the requirements, why are the requirements inconsistent?

Does the IRS Issue Forms 1099? Should It?

A Tax Court opinion released last week made me stop and ask myself a question. Does the IRS issue Forms 1099?

In Megibow v. Comr., T.C. Memo 2011-211, the Tax Court rejected a taxpayer’s argument that he was not required to include in gross income the interest that the IRS had paid him on overpayments he had made. The conclusion is inescapable. Interest is included in gross income, unless it is tax-exempt, which the IRS payments were not. One of the arguments raised by the taxpayer was that he was not required to include the interest in gross income because the IRS had not issued to him a Form 1099 reporting the interest. The Tax Court pointed out that failure to receive an information return, such as a Form 1099, does not transform gross income into excluded income, citing Vaughn v. Comr., T.C. Memo 1992-317, aff’d without pub. Op., 15 F.3d 1095 (9th Cir. 1993). Apparently the IRS did not contend that it had issued a Form 1099, and that is what made me wonder if the IRS issues those forms.

Unless I am missing something, the IRS is not required to issue a Form 1099. Technically, the Form 1099 is an information return, conveying to the IRS tax-related information about a transaction in which other parties have engaged. The taxpayer receives a copy, but technically the taxpayer, by having engaged in the transaction, already knows the information. The taxpayer’s copy is, in this respect, a convenience. The IRS does not report to itself information concerning a transaction in which it has engaged.

The follow-up question is whether the IRS should issue Forms 1099, not only as a convenience to taxpayers, but also as a reminder to taxpayers that they have gross income in the specified amount. Compliance with respect to interest income reporting would increase. The IRS would spare itself the aggravation and cost of going through what it had to go through in this case. Because many taxpayers react to a Form 1099 with the thought, “I must report this because the IRS knows about it, and if I don’t report it, the IRS spotlight will shine on me,” the benefits of requiring the IRS to issue Forms 1099 – or of the IRS voluntarily choosing to do so – outweigh the costs.

One wonders how many other taxpayers failed to report interest paid by the IRS, how many were tagged by the IRS, and how much it cost to bring them into compliance. Surely those who are escaping taxation by failing to report the interest would not be happy with my suggestion, but anything that increases tax compliance is a step in the right direction. The tax and deficit burdens on those who comply are increased by those who do not comply. Having the IRS issue Forms 1099 would ease that inappropriate shifting of burden.

You Know the Election Cycle Has Started When The Tax Talk Gets Even Dumber

Taxes certainly get a lot of attention. This is particularly noteworthy when one considers that taxes are not like the matters that usually get lots of attention. Taxes are not celebrities, taxes are not weather crises, taxes are not sporting events or fantasy football. It certainly is amusing, almost, that something almost no one likes gets so much air time.

Jon Huntsman has entered the tax conversation. His plan, outlined here, is quite familiar. His plan “eliminates all deductions and credits in favor of three drastically lower rates of 8%, 14% and 23%.” Surely that cannot be so. Does he plan to eliminate the credit for taxes withheld from a person’s paycheck? Or the credit for making estimated tax payments? Does he plan to eliminate business deductions and impose an income tax on gross profit? Is the standard deduction headed for the dustbin of tax history? Will the deduction for personal and dependency exemptions also get trashed? The problem with this “soundbite” planning is that it would leave a person earning $20,000 with a federal income tax bill of $1,600, a social security tax bill of $1,530, and state and local income, sales, and other taxes of who knows how much. Under current tax law, a person scraping by on that sort of salary – a consequence of all the wonderful jobs created by the Bush tax cuts – would need to cut at least $1,600 from their other spending. Perhaps more, if this person qualified for the earned income tax credit. So, let’s see, the poor person’s taxes go up and the wealthy person’s taxes go down, down even more, as a reward for the superb performance of the economy triggered by the last round of tax cuts for the wealthy.

The Huntsman plan not only nails the poor, and to a lesser extent, the middle class, through its elimination of all deductions and credits, it also crushes those on the lower rungs of the economic ladder by eliminating all taxes on capital gains and dividends. This tax break goes to those who can afford to have capital gains and dividends. Again, it’s not the poor, and it’s not most of the middle class who will throw we-have-even-lower-taxes parties. Note that interest would remain taxable, as that is the type of investment income most predominant among the poor and middle class. Under Huntsman, the federal income tax burden would fall on wage earners. Happy Labor Day.

Huntsman’s rationale for not taxing capital gains and dividends is seriously flawed. According to Huntsman (or, more likely, the people who created “his” plan and financing its hype), “Because dollars invested had to first be earned, they have already been subject to the income tax. Taxing these same dollars again when capital gains are realized serves to deter productive and much-needed investment in our economy.” Testing this assertion with an example demonstrates why Huntsman or those hyping this plan don’t understand federal income taxes. Taxpayer T invest $1,000,000 in Z Corporation stock. Things go well, and eventually T sells the stock for $3,000,000. Current law taxes T on $2,000,000, not $3,000,00, and it already taxes T at a rate lower than the rate imposed on hard-working wage earners doing more than sitting back and watching stock price reports. Huntsman’s argument for not taxing capital gains makes sense in terms of not taxing the $1,000,000 that T “gets back” when T sells the stock, but current law doesn’t tax that $1,000,000. It’s called basis. On the other hand, the $2,000,000 of capital gain has not been taxed and thus taxing it at this point is not taxing “dollars [that] have already been subject to the income tax.” This is far from the most difficult and complicated aspects of federal income taxation. Just about every student in basic federal income tax courses learns this and understands this. Huntsman and his team – who perhaps never saw an income tax course – are the sort of people who require the use of “just about” as a limiting modifier on the word “every.” What is more likely is that Huntsman and his backers know quite well the truth, that the $2,000,000 has not previously been taxed, but are trying to dupe the American public into thinking that cutting taxes on capital gains is good for America. It’s good, but not for America. It’s good for the wealthy who are bankrolling Huntsman and the other politicians who parade out the same tax misinformation. If all Americans were required to learn tax in high school, as I have often proposed, it would be much more difficult for those selling this tax deception to find people willing to jump on the lie train. Is it any wonder that the same “tax only wages” crowd seeks to cut funding for education? An educated electorate is the enemy of the manipulators. And the manipulators know that.

If this nonsense about taxes is any indicator, we’re in for a long, lie-filled election season. At least it will give me plenty of topics for this blog.

Employee or Independent Contractor? For Taxes, It Matters

Whether a person who is performing services ends up characterized as an employee or as an independent contractor affects a variety of tax issues. For example, the payor’s withholding responsibilities differ, employees being subject to withholding but most independent contractors not being subject to withholding. As another example, if the person is an independent contractor, the person is subject to self-employment taxes barring the application of an exception, whereas the person’s status as an employee means that the social security and Medicare tax responsibility is split between the employee and the employer. A very recent case indicates yet another significance, namely, whether deductible expenses incurred in the performance of the services are deductible in computing adjusted gross income, on Schedule C, or are deductible as employee business expenses, on Schedule A, subject to the 2-percent-of-adjusted-gross-income floor. This recent case caught my eye because the taxpayer was performing services as an adjunct professor.

In Schramm v. Comr., T.C. Memo 2011-212 (30 August 2011), the Tax Court held that the taxpayer was an employee and not an independent contractor. The court analyzed eight factors in reaching its conclusion. The facts supporting employee classification overwhelmed those supporting independent contractor classification.

Degree of Control: Supporting employee classification: university specified textbook taxpayer was required to use, university determined the topics to be covered, university set the length of the course, university managed enrollment of students, university provided web site used for online portion of courses, university imposed employment policies, such as sexual harassment, drug use, and conflicts of interest, on taxpayer, university treated taxpayer as employee. Supporting independent contractor classification: taxpayer followed independent approach in teaching classes.

Investment in Facilities: Supporting employee classification: university financed staff for recruiting, registering, and keeping records with respect to students. Supporting independent contractor classification: taxpayer maintained home office for teaching purposes, purchased office supplies, paid for an internet connection and computer.

Opportunity for Profit or Loss: Supporting employee classification: taxpayer’s pay based on number of classes taught, with no opportunity to change it. Supporting independent contractor classification: none.

Right to Discharge: Supporting employee classification: despite lack of evidence, it appeared university could terminate taxpayer’s services at any time, university could decline to pay taxpayer to teach additional courses. Supporting independent contractor classification: none.

Work is Part of Principal’s Regular Business: Supporting employee classification: university’s regular business is education of students and evaluation of their work, for which taxpayer was hired to do. Supporting independent contractor classification: none.

Permanency of Relationship: Supporting employee classification: taxpayer had long-term, consistent contractual relationship with university. Supporting independent contractor classification: none.

Relationship the Parties Thought They Created: Supporting employee classification: university and taxpayer acted as though relationship was employment, university withheld taxes, issued a Form W-2 to taxpayer, and did not check the statutory employee box on that form, university informed taxpayer it had classified taxpayer as employee. Supporting independent contractor classification: none.

Provision of Employee Benefits: Supporting employee classification: none. Supporting independent contractor classification: despite lack of evidence, university did not offer taxpayer or other adjunct faculty the types of benefits offered to other categories of workers.

The taxpayer’s situation in Schramm is very similar to that of adjunct faculty generally. It certainly is very similar to the manner in which my Law School treats adjuncts. The major difference is that adjuncts are permitted to select textbooks rather than being told what textbook to use, though they do receive advice and recommendations on that point. It is possible that some of our adjunct faculty do not maintain home offices for their teaching activities, but I’ve never asked and I don’t think anyone has ever asked. Newly-hired adjunct faculty, of course, lack the permanency of relationship that existed in Schramm, though that factor alone will not change the outcome. Next time I speak with one of our adjuncts, I need to remember to ask if they receive a Form W-2 or a Form 1099. Strange that I’ve never had this conversation, but I’ve never been involved in the payroll side of things. Perhaps I’ll also ask if they have any deductible expenses related to their teaching, because the school does make available to adjuncts computers and similar equipment. My guess is that, like me, they do have computers used for teaching and other business purposes, and pay for an internet connection through which they connect to the on-line classrooms and exchange emails with students, other faculty, and law school administration.

I know I will get a response even before I see any of our adjuncts. Why? Because some of them read MauledAgain.

Addendum: As expected, I've heard from our adjuncts. They are treated as employees and receive Forms W-2. It has been this way for about five years. Previously, they had been the recipients of Forms 1099.

Storms, Public Infrastructure, and Taxes

Though the damage caused by Hurricane Irene along the east coast of the United States was not as severe as expected, and nowhere near what it could have been, and perhaps someday will be from another storm, the damage was bad enough. For example, as reported and shown in this news story, a 900-foot section of North Carolina Route 12 in the Outer Banks was destroyed. In New York, MTA train service on Metro-North lines is suspended indefinitely on account of flooding, power outages, landslides, and track bed erosion, as reported, among other places, in this report. Damage to public infrastructure extends from Maine to North Carolina.

Repairing the damage that the hurricane caused to public infrastructure requires money. To the best of my knowledge, few, if any, of these structures and facilities are insured. Self-insurance might exist in the form of contingency funds, but several years of recession have caused many, if not most, governments and public agencies to dip into those funds. Money can be taken from other portions of the locality’s budget, but what’s left to afflict with a shortage? Should the fire department be eliminated? Should half of the police force be pink-slipped? Should public sewage treatment plants be closed?

Sometimes, no matter what people want, we, and those representing us in government, must do what we prefer not to do. That’s life. That’s also why I shudder in horror at the total inanity and stupidity of the anti-tax pledge. Technically, there are four pledges, one for House members, one for Senators, one for governors, and one for state legislators. All share, however, a promise to oppose and vote against “any and all efforts” to increase taxes. With respect to the type of situation now facing more than a dozen states, the anti-tax pledge advocate explains:

Can the language of the Pledge be altered to allow exceptions?

No. There are no exceptions to the Pledge. Tax-and-spend politicians often use “emergencies” to justify increasing taxes. In the unfortunate event of a real crisis or natural disaster, the legislator should propose spending cuts in other areas to finance the emergency response.

So in the anti-tax world, the county that wants to replace the washed out bridge or the city that wants to restore train service needs to eliminate police departments, lay off fire fighters, close down the sewage treatment plant, or reduce already bare-bone services to the citizenry. I can’t imagine what these ideologues would have argued on December 8, 1941.

Highways, Trucks, Recessions, and Taxes

One of the sights I saw, frequently, on my recent very short journey part-way across the country, was the tractor-trailer. I haven’t seen this many tractor-trailers on a per-mile basis for a long, long time. Because of past experiences, I have convinced myself that when recessions occur, truck traffic decreases. I can remember several recessions during which truck traffic was so reduced that the definition of “open road” almost required rewriting. Past experiences also taught me that truck traffic declined on weekends and almost disappeared on Sundays. That wasn’t the case in August of 2011. Truck traffic was incessant.

One of the questions that popped into my head was a consequence of my curiosity. “What’s in the trucks?” Occasionally, the answer was apparent. Those hauling new cars or cattle pretty much reveal their cargoes. Most of the trucks, however, consist of a tractor and a box trailer or container on a flatbed. “What’s in there?” Food? Is more food being shipped by truck than in the past? Despite recessions, people eat, so I’ve figured that the trucks carrying necessities, such as food, don’t change in number very much. So what’s in these trucks? Not too long into the trip, when I caught sight of this news, a possible answer appeared. Were these trucks filled with $9,010 Chanel sequined tweed coats? Were they carrying $775 Christian Louboutin “Bianca” platform pumps? Even if I had the audacity to find a way to look into the truck trailers (not that I would and not that I’d see much but cartons and crates), I wouldn’t have recognized these things. I’m just copying what I read, because I have no clue as to what these items are and why they are so expensive other than the ever-present desire of the elite to possess something most others cannot afford and to have a name or tag attached so that they are certain the world recognizes them as special and elite. And wealthy.

One of the feelings I encountered during this trip was the rattling, shaking, and banging that is experienced when driving off-road. Yet I did not drive off-road. About the time that I embarked, I had noticed a puzzling statement by Peter King in his MMQB column. He wrote, “Then Lou [the driver of the bus] climbed into the driver's seat and we started buzzing up I-85 toward Redskins camp in Northern Virginia, 490 miles of bumpy bliss while writing this column. Let's just say I would have written longer overnight if the interstate highway system in this country weren't as much of a roller coaster.” Haven’t ventured on interstates during the past two years other than those within a few miles of home, I wondered what he meant. I found out, when I reached I-70 in Illinois. I thought I had crossed the border into a still-developing country. I was reminded of stories from people I know who have driven in some of the countries formerly behind the Iron Curtain. My thought that perhaps it was “last on the list” to be repaired was quickly dispelled as I encountered more and more interstate miles marked with PERMANENT “rough road” signs. On the return leg of the journey, I traversed the Indiana Toll Road, hailed by advocates of privatization of public assets as proof of the superiority of their “shrink government” mentality. Guess what? Parts of that road rivaled the atrocious condition of I-70 in Illinois. There’s no guessing in determining why these roads are a mess. The anti-tax movement is succeeding in wrecking the nation’s infrastructure, banking on an exasperated public giving in to the “private milking of public assets” game that, in the long run, as seen in Indiana, leaves the country no better off and a few special elites wealthier. Perhaps they’re trying to save up to buy a few more dozen pairs of shoes.

My conclusion is that there are two Americas. One, inhabited by the wealthy, is nowhere near a recession, doesn’t worry about highways because helicopters and private jets don’t use them, and detests paying taxes. The other, inhabited by everyone else, is in the economic doldrums, if not ready to fall into another recession or depression, endures deteriorating infrastructure and reduced services, suffers from unemployment or employment at wages falling in real dollar terms, and yet despite holding an overwhelming number of votes, manages to perpetuate the system that keeps them down. Perhaps after paying for more shock absorber and tire replacements, front end alignments, and suspension adjustments, they will decide that it’s cheaper, in the long run, to pay increased tolls.

Two Types of Tax Increases

Apparently there are two types of tax increases in this nation. And apparently one type is very bad and the other is very good. How does one tell the difference? Read on.

A story broke last week, reported by the Associated Press and other sources, that the Republican members of Congress are opposed to extending the social security tax cut that was put into effect for this year. This tax cut applies to a tax imposed on the first $106,800 of wages, and reduced the 6.2% employee portion of the tax to 4.2%. The purpose of the reduction was to put more cash in the hands of ordinary consumers, whose increased purchasing stimulates the economy and creates jobs.

Failing to extend the cut, in other words, permitting the tax rate to return to 6.2%, is viewed by many as a tax increase. As I explained about a month ago in Tax Semantics, allowing a temporary tax cut to remain temporary is not a tax increase, though arguing that point is a distraction from the real issue. But for purposes of this discussion, calling it a tax increase drives home the larger point.

A rational person who pays attention to national politics would not be amiss in concluding that the anti-tax crowd, and that includes almost every Republican member of Congress, would be horrified at the idea of letting the temporary social security tax cut expire. After all, they are livid at the idea of letting the Bush tax cuts benefitting the wealthy terminate. Yet these anti-tax crusaders do not hesitate in their willingness to let the social security tax cut expire. Representative Jeb Hensarling claims that although lower taxes are better than higher taxes, “not all tax relief is created equal.” In other words, for these anti-tax Republicans, tax relief for the wealthy apparently is much more important than tax relief for low and middle income wage earners. Representative David Camp, who chairs the Ways and Means Committee, explained that tax reductions, “no matter how well-intended,” will increase the deficit and make the task of reducing the deficit “that much harder.” Camp gets points for that obvious bit of wisdom. If tax reductions, however, are a problem, then are not the Bush tax cuts even more of a problem, considering that they dwarf the social security tax cut? Where was Camp when those cuts were scheduled to expire and his colleagues went all out, in the face of spiraling deficits, to extend those tax cuts? Do we sense a double standard?

According to anti-tax Republicans, there is consistency in opposing a tax cut extension for ordinary Americans while heaping tax reductions onto the mega-rich. It is better, they say, to reduce corporate taxes and the tax burdens of the wealthy than it is to extend the social security tax cut. A spokesperson for House Majority Leader Eric Cantor claims that Cantor “has never believed that this type of temporary tax relief is the best way to grow the economy.” If he means that temporary tax cuts are not the answer to economic growth, then why the support for the extension of the temporary Bush tax cuts? If he means that temporary tax cuts for low and middle income individuals is not the answer, but that tax reductions for corporations and upper income individuals is the solution to the nation’s economic problems, can he please explain why the Bush tax cuts, rather than helping the economy, contributed to its downturn?

The answer might not be an extension of the social security tax cut. After all, the social security trust fund needs to be maintained and expanded to cover the benefits that are due to retirees in future years. The answer is to let the Bush tax cuts expire, and, ideally, to recoup the tax breaks from those who took them under the pretext of creating jobs that they had no need to create and no intention of creating.

So is there a double standard? Indeed there is. Perhaps a better word is hypocrisy. It’s interesting to watch the anti-tax group get painted into a corner as they are compelled to confess that they are not anti-tax across the board, but opposed to taxation of corporations and wealthy individuals. That does make sense from one perspective. Consider who contributes to the cost of acquiring elective office.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part X

This is the tenth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I close the series with a Supreme Court tax case involving a Thomas Maule descendant.

Sarah Prudence (Sally) Ordway (1910-1997), 7-great-granddaughter of Thomas Maule of Salem, Mass., and my 8th cousin: Sarah’s interest in a trust set up by her father, John Gilman Ordway (6-great-grandson of Thomas Maule of Salem, Mass.) was the subject of a gift tax disclaimer case, U.S. v. Irvine, 511 U.S. 224 (1994).

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IX

This is the ninth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two members of the single tax movement.

Louis Blaul (1854-1909), married to Mary Conard Clendenon, 3-great-granddaughter of Thomas Maule of Salem, Mass., and my 3rd cousin four times removed: According to the Single Tax Review (1910), on googlebooks, “The death of Louis Blaul of West Philadelphia, robs that city of an earnest and devoted Single Taxer.” His funeral, we are told, was conducted “as he had desired, not according to the rites of any church, but by officiating Single Taxers.” One of many explanations of the single tax, and its chief advocate Henry George, can be found in this article.

Earl Harrington Foote (1882 - ?), 6-great-grandson of Thomas Maule of Salem, Mass., and my 7th cousin once removed: In 1920, Earl was a candidate for governor of Ohio on the single tax party ticket. According to Our Campaigns, he received 1407 votes, 0.07% of the total. In the 1930 census of Ohio, his occupation is listed as real estate agent. Earl was a 4th cousin three times removed of Louis Blaul’s wife Mary Conard Clendenon, but it is not known if Louis and Earl knew each other or knew of each other, though both were adherents of the single tax.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VIII

This is the eighth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with a tax return preparer.

Evelyn Newton (1919-2002), 7-great-granddaughter of Thomas Maule of Salem, Mass., and my 8th cousin: Among the many careers juggled by Evelyn was tax return preparer employed by H&R Block. Her interests and skills reached beyond taxation, as she was employed by Utah Power and Light, and the Bureau of Reclamation. She also was an Herbal Life and Vanda Make-up distributor for more than a quarter of a century. (Primary source: her obituary in the 5 July 2002 Salt Lake City Deseret News)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VII

This is the seventh in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with tax accountants.

Willard Clinton Warren (1922-2009), 5-great-grandson of Thomas Maule of Salem, Mass., and my 3rd cousin twice removed: Willard ended his long career as senior tax principal of KPMG Peat Marwick’s Boston office. After serving in the Army Air Corps during World War II, he returned to Bowdoin College to complete his degree, and then joined the family business, Warren Publications. After a few years as manager of Pro-Con, he joined Mount and Carter, a Boston accounting firm, which through a series of mergers, became part of KPMG Peat Marwick. (Primary sources: his obituary in the 16 April 2009 Portland (Maine) Press Herald, in the Bowdoin College Magazine, and in the Conway Daily Sun.

Charles Banks King (1927-2008), 6-great-grandson of Thomas Maule of Salem, Mass., and my 5th cousin once removed: Charles as a CPA, educated at Principia College and the University of Miami Graduate School of Business Administration. He was director of the Estate Planning Council of Greater Miami, was a member of committees of the Florida Institute of CPAs, and served in leadership capacities at many other civic and professional organizations. He was a director and treasurer of the Miami Beach Taxpayers Association. (Primary source: his obituary in the 21 Dec 2008 Miami Herald)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VI

This is the sixth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with members of local tax boards.

Frederick William Savory (1927-2004), 7-great-grandson of Thomas Maule of Salem, Mass., and my 8th cousin: Frederick was a dairy farmer and crop supply company owner who served for many years on the Town of Greene (N.Y.) Tax Grievance Board. (Primary source: his obituary in the 11 August 2004 Binghamton Press & Sun Bulletin)

Richard Edgar Hewitt (1920 - ?), 5-great-grandson of Thomas Maule of Salem, Mass., and my 5th cousin twice removed: According to a 1982 clipping in an Evansville newspaper archive, Richard, who was president of the Hoover Abstract Corp., served on the Vanderburgh County Tax Adjustment Board as well as on several other civic and governmental boards and commissions.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part V

This is the fifth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two local tax officials.

George Perry Worrell (1863-1942), married to Mary Louisa Ogden, 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 4th cousin 3 times removed (in addition to being a cousin through my Ogden ancestry): In the 1930 census of Pennsylvania, George’s occupation is listed as tax collector. On the three previous census enumerations, he had been listed as a salesman for a grocery store, but it’s not known if the tax collector position followed a career path change or a second job. I haven’t been able to learn anything more about his public service as a tax collector.

Joseph M. J. Flaig (1882-1933), married to May P. Neave, 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 4th cousin 3 times removed: In the 1930 census of Missouri, Joseph’s occupation is listed as tax assessor for the city of St. Louis. According to his death certificate, at the time of his death he was deputy assessor for the city of St. Louis. I know nothing else about him.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IV

This is the fourth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two IRS employees.

Juanita Maude Tucker (1922-2006), 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 3rd cousin three times removed: According to her obituary, Juanita “retired in 1988 after an exemplary 20-year career with the IRS.” Before working for the IRS, she was a co-owner and operator of the Powder Puff Beauty Shoppe in Bloomington, Texas, a business she started after raising her children. I do not know in what capacity she worked at the IRS. (Primary source: her obituary.

Rose Marie Randolph Agnes Maule (living), 6-great-granddaughter of Thomas Maule of Salem, Mass., and my aunt: After raising her and uncle Joe’s children, aunt Rose worked for many years as an IRS tax examiner in Philadelphia before retiring some years ago. I’ve never tried to pry into the details of what she did, respecting the confidentiality restrictions to which she was subject. My career with the Chief Counsel to the IRS began before I had learned that Aunt Rose was a tax examiner, though shortly after she had taken the position.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part III

This is the third in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two employees of predecessors to the IRS.

Roy Levi Maule (1889-1940), 4-great-grandson of Thomas Maule of Salem, Mass., and my 4th cousin three times removed: In the 1930 census of Oregon, Roy’s occupation is listed as deputy collector for the Bureau of Internal Revenue. Many years ago, his cousin and son described his occupation as a public accountant, making no mention of his career with the BIR. In the 1920 census his occupation is listed as bank teller and in the 1910 census he is listed as a confectionary salesman.

Joshua Clendenon (1813-1892), great-great-grandson of Thomas Maule of Salem, Mass., and my 2nd cousin five times removed: During 1865 and 1866, Joshua was employed as a clerk by the Office of Internal Revenue, Department of the Treasury, in Washington, D.C. According to the 1860 census of Pennsylvania, he was working as a conveyancer before he moved to Washington. He eventually returned to Philadelphia, presumably after he retired. (Primary source: Congressional Serial Set, Issue 1293)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part II

This is the second in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with an IRS and a Treasury official.

James Albert Mackey (1943-1999), 6-great-grandson of Thomas Maule of Salem, Mass., and my 7th cousin once removed: From 1971 through 1980, Jim was an assistant commissioner of the IRS. He had worked at Deloitte and Touche after completing military service, and after his departure from the IRS he founded the accounting firm of Mackey and Kirkner in Newtown Square, Pa., where I grew up. His son Jim was a student of mine at Villanova’s Law School in the 1990s. (Primary source: his obituary in the 23 Nov 1999 Philadelphia Inquirer)

Lorin Blodgett (1823-1901), 3-great-grandson of Thomas Maule of Salem, Mass., and my 4th cousin four times removed: Among Lorin’s many careers were positions as manager of the Treasury Department’s financial and statistical reports, as appraiser-at-large of customs, and as special assistant in the Treasury Department. When not busy with Treasury matters, he made time to found the U.S. Weather Bureau, serve as assistant at the Smithsonian Institution in charge of climatology research, present papers on atmospheric physics, direct the surveying and determination of gradients and altitudes for the Pacific railway, work in the War Office, write at least 150 books, 350 pamphlets, thousands of editorial articles, and countless reports, edit newspapers, serve as secretary of the Philadelphia Board of Trade, and take the industrial census of Philadelphia four times. His “Commercial and Financial Resources of the United States” was reprinted in Germany and was a significant factor in maintaining the nation’s credit in European money markets. (Primary source: Famous Americans)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part I

This is the first in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. Why this 7-great-grandfather and not one of the other 511? In part because I carry his name and his y-DNA, in part because I have not identified all of the other 511, and in part because I have not done similar research for the descendants of the other 511 whom I can identify. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I begin with a legislator.

Francis E. Holman (1915-1991), 7-great-grandson of Thomas Maule of Salem, Mass., and my 8th cousin: Fran Holman, judge, state senator, and member of the state house in Washington, built his reputation as an independent legislator who “served the public rather than special interests” and was free from political influence. Former governor Dan Evans remarked, “Mr. Holman couldn’t be budged even by The Boeing Co., taking a stand involving taxation that Boeing opposed.” Reportedly that stand cost him his partnership in one of the state’s largest and most elite law firms. While in the state legislature, he was active in tax reform, “making [the issues] understanable to the public.” (Primary sources: his obituaries in the 11 June 1991 Seattle Post-Intelligencer and the 6 June 1991 Seattle Times)

Tax Complexity: Why?

It is no secret that I find the complexity of the Internal Revenue Code to be unjustified, oppressive, counter-productive economically, and the consequence of politicians creating new provisions rather than expanding existing ones, because the former is more advantageous to incumbents concerned about the source of their next campaign funding dollar. Last week I had the opportunity to gather some facts illustrative of this problem. After I finished writing the analytical portion of the next edition of Tax Management, Inc’s 597 T.M., Tax Incentives for Economically Distressed Areas, I turned to what is called the Portfolio Description Sheet. I counted up the number of issues that are discussed, and then, out of curiosity, I compared the results with their counterparts in the first edition of the Portfolio, written in late 2004 and published in early 2005. The Portfolio analyzes tax provisions that pump money into economically distressed areas, an approach that began in the 1990s as Congress chose to ignore direct grants that constitute spending and decided to use tax breaks that are, in effect, spending, though the beneficiaries of these provisions and their Congressional protégés refuse to treat them as spending and thus consider any reduction or elimination of these tax breaks to be tax increases rather than spending cuts.

The first edition dealt with six types of what I call qualified distressed areas. Early in the “use the tax law rather than spending grants” game, Congress created things such as empowerment zones, enterprise communities, renewal communities, and the District of Columbia Enterprise Zone. By 2011, the six had grown to 14, with the addition of an array of disaster areas, economically distressed production areas, and recovery zones. Though each of the 14 share the characteristic of being an area that has suffered or is suffering from economic set-backs, each one is defined differently.

The first edition of the Portfolio discussed 11 types of qualified assets, including enterprise zone businesses, renewal community businesses, qualified zone property, qualified renewal property, and DC Zone assets. The number of qualified asset types addressed by the second edition grew to 17. Added were things such as qualified equity investment and recovery zone property. Again, though these assets share the characteristic of being used in a qualified distressed area in some manner, the technical details buried in the definitions can make eyeballs spin. For example, try to imagine the differences among these types of property: qualified recovery assistance property, qualified section 179 recovery assistance property, qualified disaster assistance property, and qualified section 179 disaster assistance property.

The first edition analyzed 19 specific tax benefits available to taxpayers who meet the requirements for operating a business or making investments in a qualified distressed area. By 2011, the number had grown to 93. You read that correctly. From 19 to 93. Sounds like the title to the biography of someone’s adult life. The number of exclusions and deductions grew, and to that list were added more than a dozen credits. For example, there is a deduction for qualified disaster expenses and special rules for federally declared disaster area casualty losses.

Finally, the first edition described 12 tax detriments imposed on taxpayers who claimed one or more of the tax benefits. For example, amounts for which a deduction is provided cannot be used to increase basis, and in some instances, if property ceases to be a qualified asset, some sort of recapture applies. In the second edition, there are 51 tax detriments that need attention.

If that doesn’t demonstrate the unchecked growth of the tax law, try this. The manuscript for the first edition consisted of 172 single-spaced pages, with 1,708 footnotes. Using the same margins, font, and other parameters, the manuscript that I completed last week consists of 325 single-spaced pages, with 3,916 footnotes.

Isn’t it time that people get a handle on how much spending has been enacted in the tax law? Ought not economic benefits be treated in the same manner, whether they are direct grants or disguised grants hiding in complex Internal Revenue Code provisions? Is it not possible to create one set of rules for economically distressed areas? Why was it not enough to have empowerment zones? Why add renewal communities? And enterprise zones? Why are some tax benefits available to the Kansas disaster area but not the Hurricane Ike disaster area? Why are the special rules for the Midwestern disaster area different, and in some instances slightly different so as to catch the unwary off-guard, than those applicable to the Rita GOZone? Why are there different rules for the Hurricane Katrina disaster area and the GOZone, considering that the former is pretty much the latter? It’s not as though each time around, Congress refined the provisions and made them better or easier to understand. To the contrary, each of the many dozens of times Congress has added, modified, twisted, or tinkered with the provisions, the language became denser and longer. Why?

The Value of Tax Education

Yes, I’m a fan of education, and I am an advocate for the value of tax education. Tax education is what I do with much of my time, teaching law students, lawyers, and accountants, writing books and articles for tax practitioners and, from time to time, for others, and publishing a blog directed to an audience of tax professionals and those who do not make their livelihood in the tax world. I’ve touched on this in a variety of posts, including Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, and The Consequences of Tax Education Deficiency. Though usually my focus is on the inability of legislators to understand what they are doing, particularly the damage they are causing, and on the disadvantages of an electorate unschooled in tax reality, the problem also touches on individual situations that don’t get very much public attention. Nonetheless, they can be good examples of how tax ignorance adversely affects people apart from matters of national tax policy debate.

A Tax Court decision involving an accountant brings this issue back into the spotlight, if only for a moment. It is unclear from the opinion whether the taxpayer did any tax work. Most accountants take at least one basic tax course, and many enroll in multiple courses, even earning degrees such as the M.T., because of the impact tax rules make on accounting analysis, the “reserve for taxes” being one such example. In Mondello v. Comr., T.C. Summary Opinion 2011-97, the Tax Court held that the taxpayer was not permitted to accrue a deduction for the value of services he rendered to his sole proprietorship operating as an LLC under state law. The taxpayer, in addition to be employed by an unidentified business, owned a web site and spent time maintaining the site. He also performed web site services for unrelated parties, charging them between $45 and $55 an hour. Because he invested 1,000 hours in 2007 developing his own web site, the taxpayer accrued a $50,000 deduction on his Schedule C.

The Tax Court disallowed the accrued deduction for the taxpayer’s own labor performed for himself. The Court relied on three cases. In Rink v. Commissioner, 51 T.C. 746 (1969), the Tax Court explained that just as imputed income from the benefit of taxpayer’s own services is not included in gross income, neither is an imputed expense arising from his own labor for himself deductible. The Court specifically stated, “Labor performed by a taxpayer does not constitute an amount ‘paid or incurred’ by him, and consequently, cannot be deducted by him under section 162.” Later, in Grant v. Commissioner, 84 T.C. 809 (1985), aff’d without pub. op., 800 F.2d 260 (4th Cir. 1986), the Tax Court said repeated the conclusion that a taxpayer’s labor is not payment of a deductible business expense. In Maniscalco v. Commissioner, T.C. Memo. 1978-274, aff’d, 632 F.2d 6 (6th Cir. 1980), the Court reiterated the point, stating, “Whatever may be said in behalf of taking into account the value of one’s own services in lieu of paid labor, such services are not considered an element of the deduction under section 162(a), just as the flow of satisfaction from services arising from one’s own labor is not includible in his gross income.”

This outcome is a basic federal income tax principle. Students in basic tax courses learn it. Compared to much of what they must work through in such a course, this principle is easy as a rule and not particularly challenging in terms of learning its rationale. What’s surprising about the Mondello case is not the outcome, but the fact that the case exists.

The taxpayer tried to distinguish the three cases on which the IRS relied and that the Tax Court cited in support of its decision. The taxpayer noted that the taxpayers in those three cases were cash method taxpayers and that he was an accrual method taxpayer. The Court’s reply is the sort of opinion language that no litigant wants to read or have the world see: “Perhaps petitioner did not read Rink or he failed to read it carefully. The Court pointed out in that case that the taxpayer took the position, as petitioner does, that ‘he should be permitted to accrue currently, as a liability, amounts owed by him to himself on account of his labors, but include the value of such labor in income only when and if such labor gives rise’ to income in the future. The Court found the argument to be without any merit; ‘For one thing, we have found that the petitioner incurred no liability, in favor of himself or anyone else, to pay for the value of his services.”

Whatever may have inspired the taxpayer to claim the deduction, that gaffe was multiplied when the taxpayer did not look closely at the cases cited by the IRS. The cost of the litigation, the additional interest and penalties, and the aggravation of the entire situation could have been reduced. It is not beyond the realm of possibility that the taxpayer did read the cases, and did look closely at them, but did not understand them. Though many people think tax is all about numbers, it’s actually almost all about words. Perhaps therein is the answer. Perhaps the taxpayer, like some accountants learning tax, was looking for numbers rather than absorbing the meaning of the words.

Tax education. Priceless.

User Fee Accountability

A few days ago, in States Eye Fee Increases as Alternative to Taxes, two associated press writers shared a sampling of fees that had been added or increased by state and local governments governed by politicians reluctant to support tax increases. The list, which surely is but a fraction of the fees in question, is long, and includes parking fees, vehicle registration fees, driving exam fees, park use fees, day care license fees, fireworks permit fees, traveling circus fees, medical marijuana fees, over-the-counter drug fees, sightseeing tour fees, smartphone applications fees, traffic fines, birth certificate fees, and many more described in the article.

In Texas, a state representative has introduced legislation requiring that fee increases be labeled as tax increases. His proposal is a reaction to complaints that by increasing fees, legislators simply are finding ways to increase government revenue without voting for tax hikes. The Texas legislator claims that a user fee should be called “what it is: a tax.”

As readers know, I like user fees, and think they should be used wherever possible. Seven years ago, in Turnpike Tolls: User Fees in Context, I wrote, “As readers of this blog know, I am a fan of user fees.” Several years ago, in User Fees and Costs, I explained why roads should be funded through tolls or other dedicated fees and not general tax revenues. My support for the mileage-based road fee has been the subject of at least a dozen posts, the latest being Toll One Road, Overburden Others? In Tax? User Fee? Does the Name Make a Difference, I explained that “User fees that make the justification for government revenue easier to see, and thus easier to understand, deserve more attention and present valuable opportunities.” I elaborated on the reasons for my preference in Yet More Reasons to Prefer User Fees . In Funding the Bailout, I proposed, to no avail, a user fee on financial transactions to shift the cost of cleaning up the mess made by the financial industry from taxpayers generally to the people responsible for the financial disruptions.

Here’s the problem with the Texas propsal. The Texas state representative is correct, but only to a point. To the extent that the fee reimburses government, that is, the body politic, for the costs imposed by a person making use of a public good, the fee is not a tax. As I stated in User Fees, UK Style, “The ‘reduce tax’ crowd, of course, is opposed, even though a user fee is no more a tax than is the charge for admission to the theater. Use it, pay for it.”

On the other hand, to the extent that the fee exceeds the costs imposed by that person, and generates revenue directed to other purposes, the fee is a tax. I touched on this issue in When User Fees Exceed Costs: What to Do?. The Federal Highway Administration acted consistently with my arguments, as I noted in User Fee Philosophy Vindicated, when it decided that proposed tolls for use of a certain highway should not be diverted to other uses.

Perhaps the solution is to require legislatures to publish in any legislation that increases fees, the cost accounting analysis that explains how it decided that the cost to the public of a person making use of a parking space is $20, or that the cost of processing a birth certificate is $8. People who pay fees to governments are entitled to know how the fee was calculated and to what purposes it is being spent. Transparency in this respect fortifies democracy. Those who oppose transparency make it too easy for the rest of us to wonder what they are trying to hide.

Tax Semantics

First comes news that Grover Norquist described expiration of the Bush tax cuts as not a violation of his no-tax-hike pledge. He said, “Not continuing a tax cut is not technically a tax increase.” Speaker of the House John Boehner countered that allowing the tax cuts to expire would be the equivalent of a tax hike.

Then Norquist’s Americans for Tax Reform issued a statement explaining that failing to extend or make permanent the Bush tax cuts “would clearly increase taxes on the American people” and that “[i]t is a violation of the Taxpayer Protection Pledge to trade temporary tax reductions for permanent tax hikes.”

Suppose an employer hires someone to work for $60,000 a year. During the person’s second year of employment, for whatever reason, the employer pays the employee a $1,000 bonus. During the person’s third year of employment, because of economic conditions, the employer does not pay a bonus, but the employee receives the $60,000. Though one might understand someone saying that the employee had a pay cut, the fact is that the employee did NOT have a pay cut. The employee simply did not have a repeat of a windfall. Similarly, if the government decides not to continue paying a bonus to the wealthy, for the simple reason that, like the employer in the example, economic conditions don’t permit it to do so, the government isn’t doing anything to the underlying after-tax condition of the taxpayer as it existed before the windfall was paid. The only difference between the examples is that the employer paid the bonus after deciding that the employee’s work merited a special supplement, whereas the windfall bonus paid to the would-be job creators did not bring the promised returns.

The scuffling and arguments over the difference between a tax cut expiration and a tax hike are the sort of word games that obscure the analysis. Rather than debating the merits of the tax rates that existed before the Bush cuts and the tax rates that would be restored when those cuts expire, rather than looking carefully at the economy’s condition before the Bush tax cuts and the economy’s condition as a consequence of the Bush tax cuts, rather than focusing on the impact of cutting taxes, twice, simultaneously with increasing federal spending and the federal deficit on account of waging war, those charged with the sacred fiduciary trust of caring for the nation have put on brain blinders that narrow their chatter to a debate over the phrase to apply to tax cut expiration.

It’s easy to play the game. Here’s another word to describe what happens when the Bush tax cuts are permitted to expire. Correction. Correction of a foolish, dangerous, unjustified action. The folks who brought us that debacle are now trying to convince us that it ought to be perpetuated, into perpetuity. Well, not quite, because next on the agenda are additional tax cuts. Just as increasing bonuses for employees when economic conditions are prohibitive will bankrupt the employer, continued unwarranted tax bonuses when economic conditions are prohibitive, especially when those economic conditions were caused by or at least exacerbated by those tax bonuses, will bankrupt the nation. Perhaps to people who care more about party and philosophy than national interest, this doesn’t matter much, if at all. I wonder what interesting word will be invented to mask that bankruptcy. Privatization?

No Tax Increases, No Fee Increases, No Roads, No Bridges?

The Transportation Advisory Commission appointed by the governor of Pennsylvania returned with recommendations earlier this week dealing with the gap between how much money the state has to repair and maintain transportation infrastructure and how much money is required to keep bridges from falling down, roads from crumbling into rutted stone piles, and tunnels from collapsing. The gap is $3.5 billion. Considering that Pennsylvania has more structurally deficient bridges than any other state, in addition to at least 7,000 miles of bad roads, the $3.5 billion amount, hefty as it is, ought not be surprising.
The Commission, which has the power to make suggestions but not to implement any of them, offered a variety of suggestions. As summarized in this Philadelphia Inquirer story among the Commission’s recommendations are increases in vehicle titling fees, vehicle inspection fees, driver license fees, and fees for similar documents. It suggested a new “local registration fee.” Another new fee would be a $100 surcharge imposed on motorists who rack up more than one moving violation in a year. And, yes, it recommended an increase in the wholesale gasoline tax, which translates into a 22 cents per gallon jump in pump prices. The Commission also advocated a cost-cutting plan, to permit biennial rather than annual vehicle registrations and to extend the life of a driver’s license from four years to eight years.

Aside from the safety concerns of letting people go eight years without checking in for a vision or other test to obtain a license renewal, the most noteworthy aspect of the Commission’s ideas is that they conflict with the philosophy of the governor who appointed its members. Pennsylvania’s governor is among those who oppose tax increases, period, and though he has given hints that he is open to new user fees and increases in existing ones, nothing of the sort has materialized. The governor, of course, is free to disregard the Commission’s ideas, because it is simply an advisory commission. But what alternatives are there? One is to let transportation infrastructure spending drop to what can be supported by current revenue, causing an increase in the number of deficient bridges and miles of sub-standard highways. That, of course, will lead to more accidents, deaths, and injuries. Nice choice. Another option is to downsize, by closing down the highways and bridges that are deficient and for which there is no revenue to make repairs. That, of course, will lead to traffic congestion, more wear and tear on highways that remain open, until those are closed from the increased damage, and breakdowns in the transportation system that brings supplies to, and provides means for shipping products from, the state’s farms and businesses. This choice is pretty much an economic death spiral.

The governor is in a tough spot. I have no sympathy for him, because it’s a tough spot of his own making, with much help from those who financed his acquisition of the office. If he raises taxes and user fees, he will be seen by his supporters as a hypocrite, as someone who sold out, and as unreliable. His appeal among the anti-tax crowd would diminish, and barring a transformative experience taking him to the other side of the political spectrum, would essentially end his political career. If he stands firm and rejects tax and fee increases, he becomes an historical figure forever associated with the transportation infrastructure disasters and ensuing economic catastrophes triggered by unwise underfunding. Might he try some legerdemain that comes up with a new name for taxes the way Ronald Reagan’s advisors used the phrase “revenue enhancements” to describe the remedy they designed when they figured out their tax cuts had been too much, too soon, and too dangerous for the nation’s survival? Is that a trick, once played, that can be used again? My prediction is that he tries to turn public transportation assets, including not only roads and bridges but also vehicle registration and driver license issuances and renewals, over to his friends in the private sector, letting them jack up what are called “prices” as they extract from the public profits that governments don’t need to generate. At that point people might begin to wonder whether there is a difference between a “tax” charged by a government for provision and maintenance of public goods and a “price” charged by an unregulated, unelected private enterprise for public goods co-opted by the private sector. Spend enough time wondering, and by the time the reality is obvious, it will be too late.

The answer to the question isn’t necessarily “if there are no taxes and no user fees there are no roads and no bridges.” The answer to the question very well may be something much worse.

Please Let Tax Intelligence Trump Vote Pandering

Please. Isn’t it time that people who step forward and offer themselves as public “servants” bring to the discussion a greater emphasis on responsibility and less concern about trolling for votes? If the message is good enough, the votes will follow. Remember the high school class president candidates who promised to repeal all examinations and grades? Plays well, especially with those ignorant of education’s value, but for the most part, fortunately, didn’t work. Unfortunately, that sort of nonsense seems to resonate among Americans who don’t quite understand life’s realities.

Early this month, a TaxProf Blog headline caught my eye, and I tucked it away for future discussion. Whose eye would not be caught by Michele Bachmann Backs One-Year Income Tax Holiday. Is she serious? Who knows? The headline linked to a Forbes article by Taxgirl Kelly Phillips Erb, carrying a similar headline, “Michelle Bachmann On Board With Tax Holiday.” Kelly’s article in turn linked to a Boston.Com story that explained Bachmann had replied positively to a question from Dan Gorman, a former New Hampshire Libertarian Party state representative, who proposed the one-year income tax moratorium. Bachmann replied, “Put a moratorium on the entire income tax for one year for every citizen in this country and watch this country take off.” Really?

Here’s what happens if the federal government stops collecting income taxes for a year, and this does not take into account the consequences of one or more states going along for this wild and irresponsible joyride. First, the federal government would be unable to pay interest on its outstanding debts. Regardless of what happens to the debt ceiling, the government would be unable to borrow additional money, because creditors will back off when borrowers lose their revenue sources, whether it’s a job or a tax revenue stream. Second, the government will be unable to pay salaries to members of the Armed Forces, including the Coast Guard, and people who staff the Center for Disease Control, FEMA, or any other agency, including the folks who do air traffic control. Third, federal courts will close. Fourth, payments to Social Security recipients, including the retired and the disabled, and to beneficiaries of Medicare and Medicaid will stop. What does this do to the economy? It destroys it. Imagine flights cancelled because there are no air traffic controllers, and no Congress – remember, there is no money to pay the legislators or to keep the Capitol open – to enact laws permitting the “private sector” to “take over” that and many other aspects of government. Imagine tens of millions of retirees with no income source, unable to pay bills and with no money to spend. Whatever increase in spending occurs from workers awash in higher take-home pay is offset by the decrease in spending by retirees. It is quite possible that health systems would go under. State and local services dependent on federal revenue shut down. A “private sector” person on his yacht off the coast of Long Island who finds himself in trouble has no Coast Guard to call. Interest rates soar. If failure to deal with the debt ceiling portends catastrophe, as many claim, the one-year tax moratorium supported by Bachmann surely will bring whatever it is that exceeds catastrophe.

Kelly Phillips Erb makes the same overall point, though not so alarmingly. She also notes that Bachmann has an LL.M. in Taxation and worked at the IRS. Bachmann is proof that working as a tax professional and earning an advanced law degree in taxation does not increase a person’s ability to reason sensibly. Kelly also suggests that Bachmann simply is playing to the masses, using rhetoric to drum up support. That would explain Bachmann’s proposal to repeal the Internal Revenue Code, along with just about everything else that the anti-authority segment of society detests, and replace it with, well, it isn’t known what Bachmann would use to raise revenue. Perhaps nothing. Perhaps Bachmann would put all government functions in the hands of the private sector individuals wealthy enough to buy the power necessary to compel everyone else what to do.

Maybe Bachmann simply is pandering for votes. But the people who listen to her Pied Piper promised land nonsense don’t know that and don’t understand that. Those who wish to be public servants have a responsibility to the nation that exceeds the attempt to be elected or re-elected and that exceeds their devotion to their political party. History tells us what happens when the interests of political parties and their financial supporters trump the national interest. It never, ever ends well.

It’s Not the IRS, It’s the Congress

Friday morning, listening to a sports-news radio station on my way home from the gym, I hear one of the commentators share a thought concerning the tax issues facing the fellow who caught Derek Jeter’s 3,000th hit. He asked, “Why does the IRS inject itself into this. Why does the IRS make these things taxable? You win a prize and the IRS takes part of it.” This comment adds more weight to my sad conclusion that the Congress, and those supporting Congress in its efforts, are succeeding in making Americans think that the IRS is responsible for the current condition of the tax law. Though I thought, as explained in Is Public Truly Getting IRS-Congress Distinction? that increasing numbers of Americans were figuring out who enacts tax law, I hesitate to continue thinking along those lines. Hundreds of thousands of listeners, having heard someone spew misinformation on the radio but considering it gospel truth because it comes from somebody who must be brilliant because he’s on the radio, have been led astray.

The Congress decided that a variety of receipts must be included in gross income, and absent deductions that totally offset those items, are subject to tax. It is the Congress that decided salaries, wages, and other compensation is subject to the income tax. It is the Congress that decided prizes and awards, but for two exceptions, are subject to the income tax. Yet people throughout America think that the IRS made those decisions. It didn’t. One of the first things students in my basic tax course learn is that the Internal Revenue Code is a creature of the Congress. I almost always test that point in some way, and the fact that more than a few of my students, intelligent people all of them, get it wrong demonstrates the extent to which this pernicious myth has been beaten into the heads of the nation’s citizens. One wonders why high school students aren’t told who enacts tax and other laws. Who benefits from ignorance on this point?

Consider an example from another situation commonly experienced by most people. A bridge is closed because it is unsafe. A police officer directs traffic to the detour. Aside from the occasional irrational driver who yells at the officer, most people understand that the police officer is not the person who decided to close the bridge. The police officer is simply enforcing the decision. Why do people understand this? Because there is no concerted effort by the officials who closed the bridge to pass the buck to the police department. On the other hand, the Congress itself constantly criticizes the IRS for doing what the Congress told it to do, in ways that make it appear to Americans that the IRS is out of line. Consequently, the IRS acquires a terrible reputation among the citizens of this country, though for other reasons the Congress doesn’t do much better.

Just last month, in If Congress Says So, Don’t Blame the IRS, I repeated my oft-raised warning that Americans need to understand who writes the tax law. As I noted more than a year ago, in Taxes and Anger, “The Congress has done a very good job making Americans think that all their tax woes, all their tax complaints, all their tax unhappiness, all the pitfalls in the tax system, and all the aggravation that federal taxation causes them is the work of the IRS.”

It’s worth repeating what I said in If Congress Says So, Don’t Blame the IRS, although I doubt the sports and news commentators read it last month or will read it this time:

So long as people view the IRS as the source of all that is wrong with taxation and the tax system, or the cause of anything they dislike about tax law and tax enforcement, and overlook the responsibility of the Congress for the tax law, tax policy, and tax administration deficiencies afflicting the nation, the problems will not be solved. Once people understand what Congress has done and is doing, there may be increasing numbers of incumbents who fail to be re-elected. But until Congress understands what Congress should be doing, replacement of incumbents by newcomers who continue the bad habits of Congress will continue unabated.

The longer the “blame the IRS for the deeds of Congress” game is played, the higher the risk that the tax system, and thus the nation, will suffer. What member of Congress has the courage to stand up and admit that it is the Congress that decided people earning salaries and winning prizes are subject to income tax on their wages and awards?

The Flat Tax Myth Won’t Die

It is disturbing that the “flat tax makes tax simple” myth continues to be circulated, even among those who should know better. This isn’t my first attempt to explain why the flat tax simplifies little, and takes confusion out of pretty much nothing. For example, in Flat is Not Simple, At Least Not with Taxes, I explained why a flat tax does not remove the features of the income tax that contribute to tax law complexity. That short essay came three years after a much longer, detailed analysis of the Forbes tax plan, in The Revived Forbes Flat Tax Plan. Two years ago, in Fighting Tax Ignorance, I took apart, among other things, Paul Ryan’s claim that reducing the tax rate schedule to one or even two rates would simplify the tax law.

This time, it’s William F. Shugart II, a senior fellow with the Independent Institute and the J. Fish Smith Professor in Public Choice at Utah State University. In Flat Tax is a Good Idea, But Spending Is the Real Problem, Shugart writes, “I strongly favor junking the mazelike federal income-tax code, nine million words long and shot full of arcane provisions supplying tax breaks to special-interest groups whose Gucci-shod lobbyists patrol the halls of Congress whenever taxes are on the agenda.” At this point, he and I are in total agreement. He continues, “Replacing those nine million words with a single tax bracket of, say, 17 percent - applying to all income, however earned, with few deductions or exemptions and no loopholes - would produce huge economic benefits.” Whether the economic benefits would be huge or merely substantial can be debated, but the adjective “few” is the doorway through which the special interests that Shugart and I think have no place in tax law would enter.

Reducing the tax rates to one rate, which is the precise definition of a flat tax, does nothing to simplify the issues that clutter tax law analysis. Taxing “all income, however earned,” is a good start, but I’ll put to Shugart the question that confronts basic tax law students early in the semester. “What is income?” Here’s a clue. There’s no definition in the Internal Revenue Code.

The prospect of eliminating all deductions invites challenges with respect to cost of goods sold. A tax on gross receipts is not a tax on income. If people think that the computation of cost of goods sold is a simple thing, they’re in for a surprise. It’s an easy concept but tough in practical application. Cost of goods sold requires determination of inventory. Books have been written on that question. Hundreds of tax cases have been litigated on inventory issues.

Playing with the section 1 tax rates does absolutely nothing to address the question of timing. It does not simplify, for example, installment sale rules, or the dozens of nonrecognition provisions that pepper the Code. And to the extent Shugart thinks a flat tax would fuel the economy, let him explain how that would happen if nonrecognition provisions were repealed. If every time a business traded in equipment for a newer version it had to pay tax, which would happen in most instances, the cash flow burden would stifle the economy. If Shugart’s response is to retain nonrecognition provisions, he’s advocating retention of tax complexity that take multiple volumes to explain. Ask anyone who has studied like-kind exchanges and involuntary conversions. Nor can I imagine what repeal of section 1041 would do to the economy.

A flat tax does not resolve the continuing debate with respect to international taxation. The question of how nonresident aliens and foreign corporations should be taxed, and the question of how American taxpayers should be taxed with respect to overseas operations, is not one that goes away if section 1 is reduced to one tax rate.

The Internal Revenue Code can be simplified. A much more practical tax law can be drafted. But it won’t rest on a flat tax. Too many of the flat tax proposals turn out to be nothing more than a flat tax on wages and a free ride for all other income. Shugart, to his credit, doesn’t advocate this, but I wonder if he realizes that many of the flat tax proposals are precisely this sort of deception. Tax ignorance is a dangerous thing. Beware.